Developing a Stable Business Model

Great business models depend on developing three ‘green lights’, or qualities that help the business succeed, as well as avoiding three ‘red lights’ that can derail a business. Examine your own business to see if you meet the criteria for success or to correct any weaknesses you might have.

Green Lights

1. Acquire high-value customers

High-value customers doesn’t mean rich customers, but customers who meet the following requirements:

Are easy to locate

Allow you to charge a profitable price

Are willing to try your product after minimal marketing expenses

Can generate enough business to meet your sales and profit objectives

If your end users or distributors don’t fit this profile, you can attract high-value customers through partnerships or alliances with companies in the market.

2. Offer significant value to customers

Create significant value and competitive advantage by including the following:

Unique advantages in features and benefits

Better distribution through retail or distribution

More complete customer solutions through alliances with other companies

Lower pricing due to manufacturing efficiencies or pricing options

Faster delivery, broader product line or more customisation options

Modern industries have become innovative in business strategy. This makes it imperative that you stay on the creative edge to fend off competition.

3. Deliver products or services with high margins

Higher margins come from having a product that can be made from an improved process or by having features that provide significant value and allow you to charge more. You can achieve this through:

Using a more efficient distribution channel

Requiring less sales support and sales effort

Lean manufacturing processes

Offering more auxiliary products or other opportunities for revenue without increasing cost

Red FLAGS

1. Provide for customer satisfaction

Consider whether it will be difficult or expensive to satisfy customers once they buy. High customer satisfaction costs can be created by:

High warranty costs

Extensive technical support

Extensive installation requirement

Extensive customer service

Interface problems with other equipment

Customer satisfaction costs, which occur after the sale, are red flags because the costs are typically high and don’t produce revenue or profits. If your type of product might have high customer service costs, you need to configure your business to put these costs on someone else.

2. Maintain market position

A good business model uses its resources to improve its market position, adding new products, features and customers or expanding into new applications. It will be difficult to maintain market position if:

Two or three major customers buy most of your product

Major potential competitors control the distribution network

Technology changes rapidly and requires high-risk product development

There are alternative technologies being developed to meet the same need

You have well funded potential competitors who could quickly move into your market

3. Fund the business

Start-up costs, operating capital, personnel costs and overhead costs are just a small percentage of the funding requirements for any business. The question is whether the investments will have a high return and whether the business can grow without substantial new investments. Red flags include:

ROI is less than 25% in the first three years

Incremental production of products or services requires substantial additional investments

Less than 50% of the investment required will be used in revenue producing areas

Investments have to be made prior to sales commitments

Industry as a whole has a poor ROI or poor profitability

Money is available for the right plan and the right model. You’ll find money available if your ROI is right and you have financial leverage, which means your initial investment will allow you to double or triple sales without requiring any more funding.

Don Debelak is a well-known invention expert who has worked with new products and inventions for over 30 years and is the author of four of the best-known invention books of the last 15 years. He also was the Entrepreneur Magazine’s Bright Idea columnist on inventions for over seven years. As of 2013, Don is also a registered patent agent, #71,743.

How To Pick The Business Model That Works For You

So, you’ve picked your lane. You’ve decided what you want to do and why you want to do it. You’ve picked something you’re good at. You’re convinced the world needs and values it. You now need to decide how to make money. That’s where business model design comes in.

There are plenty of business model options for the same idea. For example, let’s say your idea is to offer historic tours of Cape Town. You could either do it yourself or hire professional guides to do it. Or you could use mobile technology to provide DIY walking tours. You could charge per tour or you could charge a membership fee. There are so many options. How do you pick the model that works for you?

The Lean Canvas is a great tool for entrepreneurs who are faced with this question. Adapted from The Business Model Canvas, it provides a simple, one page framework for brainstorming possible business models, prioritising where to start, and tracking ongoing learning. It walks the entrepreneur through the business model process logically and ensures the key elements of a successful business are considered.

My co-founders and I have used the Canvas extensively at Simply – for designing our business model, and for communicating it to partners and investors. The only thing you know with certainty when you start a business is that it’s not going to turn out as you expect it to. The Canvas evolves as you go – it was, and continues to be, a very useful guide in our journey.

Recognising an opportunity for disruption

We figured there was an opportunity to do something disruptive in the SA life insurance space. It was clear to us that lots of people were either not covered or getting a rough deal. Guided by the Canvas, we defined our first Customer Segment as adult South Africans, aged between 25 and 45 and earning between R5k and R30k monthly.

We then identified the 3 big Problems – specific to that segment – that needed solving:

Most of the people in our segment have some form of funeral cover, but very few have life or disability cover.

The cover they do have is often expensive relative to the benefits provided (i.e. a very small % of the premium goes towards the risk costs).

There is no simple, intuitive way to buy good value life, disability and funeral cover online.

Developing a value proposition

Next came the Value Proposition. We believed we could use technology, digital marketing and human-centred product design to deliver simple, online life, disability and funeral insurance at a great price. We felt we could be for life insurance in South Africa what Takealot has been for retail.

We thought the world was moving far faster than incumbents realised; that millennials were ready to buy life insurance online; that we could build for the digital world and be in the right place at the right time.

And the rest flowed from there. I don’t have the time or the space to walk you through the other elements of the Canvas here, but you can probably fill in the blanks. Suffice to say, the process was invaluable and enabled us to build our business around a clearly considered business model. It’s early days, but the signs are good – we’re making a positive impact, having fun and keeping our investors happy.

Creating a Lean Canvas

So, how should you go about sketching your own Lean Canvas? The team at www.leanstack.com suggest the following approach:

Sketch a canvas in one sitting. While a business plan can take weeks or months to write, your initial canvas should be sketched quickly.

It’s okay to leave sections blank. Rather than trying to research or debate the “right” answers, put something down quickly or leave it blank and come back to it later.

Think in the present. Business plans try too hard to predict the future which is impossible. Instead, write your canvas with a ‘getting things done’ attitude.

Use a customer-centric approach. You may need to sketch one Canvas per customer segment. Start with the Customer Segment and go in sequence.

The Canvas has brought clarity and a common language to our business model design process. It’s enabled us to agree upon and communicate our business model effectively – both internally and externally. It’s also allowed us to tune and adjust our model as our story has unfolded – an inevitability for entrepreneurs. I highly recommend the Lean Canvas as a tool for designing your business model. Give it a try – I think you’ll like it.

Want To Change Your Business Model? Answer These 3 Questions

To grow sustainably, is it better to take on projects that are frequent and reliable, or sparse but lucrative?

Q: I own a film and production company, and I shot 100 videos last year – 70 weddings and 30 corporate, totaling $330,000 in revenue. The corporate videos are more profitable, but weddings are always happening. I don’t want to turn off a constant source of revenue, but should I spend more time pursuing corporate events to grow my business? – Trevor R.

Welcome, Trevor, to the entrepreneur’s struggle! You build a great product or service, make good money and the next thing you know, you feel like you have to change your model. It’s the age-old question of scale: What’s the best way for your business to grow, and does that mean making less revenue now in order to have more sustainable growth for years to come?

With the bulk of your time being spent on wedding videos, you probably feel stuck in the slow lane, watching better profits pass you by. But remember that scale is not just about margins.

Numbers can be deceiving, and you control what you charge for your services. While your corporate videos are more profitable right now, going all-in might not be the long-term answer.

To figure out the best route for your business, start with a clear vision of your ideal final destination. How much money – and profit – do you want to make per year? It might sound like a frivolous question (who doesn’t always want to make more?), but it will allow you to reverse-engineer your business model and help determine a practical answer.

Let’s say you want $1 million in gross revenue per year. At this time, it sounds like you charge about $5,500 per corporate video and about $2,400 per wedding video. That means you’d need to sell either 182 corporate videos or 417 wedding videos. (That’s a lot of videos!) Use those numbers to guide your vision. Next, consider scale, which depends on a number of growth factors.

First, creating value: Make sure you’re charging the appropriate amount for your services in order to reach your goals.

Second, anticipating growth: Where is the greatest opportunity, not just at the moment, but in the future?

And third, limiting expenses: How can you keep costs down so spending doesn’t outpace revenue?

Answering honestly will help you create several business models. For you, Trevor, those models are (a) weddings and corporate, (b) weddings only or (c) corporate only. As a case study, let’s consider “weddings only.”

Last year, you worked 70 nuptials. Before you consider hitting pause on that side of your business, revisit those growth factors to figure out if you can make it more profitable.

Should you charge more for each video?

How many clients did you turn down last year?

Could you have taken them on if you had extra help?

Weigh the costs, and consider adding another videographer to the staff. If that seems financially impossible, look for ways to at least maintain your current output while trimming production costs.

For a small business, profitability is a mad science of focus, projections, and getting out of your own way. What makes the most money on a per-item basis is not necessarily what will make you the most profit in the long run.

At the point of creation, a new business has a strategy. There will come a time when that model is not as attractive as it originally was. Competitors may have entered the space, or upped their game, customers might be more demanding, margins may start coming under pressure, and you as the business owner might be working 12 hour days.

That’s the time when you need to have a formal strategy workshop. You need to think through what you are doing, how you are doing it, why you are doing it and what are its benefits. That’s not going to happen when you’re moving at breakneck speed trying to keep your head above water.

If your business is to succeed in this volatile, uncertain, complex and ambiguous (VUCA) world, then it must understand exactly where it plays in the market that you have chosen, and most importantly, how it intends to succeed in this space.

The challenge that most business owners face is that there is so much pressure to put out fires that very little attention is granted to the spark of industry-defining ideas. If you want to stay in business long-term, making the time to reflect and think deeply about the direction and competitiveness of your business is nothing short of essential.

The Context

Every business operates within a far larger matrix. We are affected – positively and negatively – through external events over which we have little or no control. Currency fluctuations, Brexit, trade agreements, economics, the political environment, tax rates, legislation and a host of other influences that impact our business environment.

In a strategic planning workshop, at least a morning needs to be invested in understanding how these external factors impact the business. A PESTLEID analysis can be undertaken, and this follows the process of evaluating the Political, Economic, Social, Technological, Legal, Environmental, International and Demographic landscapes.

This process is not a conversation, but rather an in-depth analysis of each of the PESTLEID factors, each of which is broken down into detail. Each detailed factor is ranked in terms of probability and impact. High probability and high impact factors are firmly placed on the firm’s radar, and scenario planning is completed for these events. Low probability but high impact events are allocated to accountable individuals for observation, and might be scenario planned depending on their severity.

By the end of this process, each person in the room must have a sound idea as to the context in which the business is operating, and what external factors the business is likely to experience within the next year.

Through scenario planning, each individual will also understand what the best course of action will be for the organisation should any of the high-impact scenarios come to be, and will be equipped to play their role in taking those actions in order to minimise business disruption.

Customers

The only person who can tell you what your customers want and need is your customer. It is a fatal mistake to believe that anyone in your organisation is qualified to speak on behalf of your most valuable assets.

Key customers can be invited to join you for a portion of your strategy workshop, or you can survey your customers beforehand and present the information on the day.

In this conversation, you are unpacking what it is that your customers want from you. But a note of caution that is magnificently phrased by Henry Ford when he said: “If I’d asked my customers what they want, they would have told me a faster horse”.

Remember that your customers can and will generally only tell you what they want and need given the same operating conditions for both yourselves and themselves. And that’s OK, because it defines the foundational sandpit in which you are operating right now.

Customers can tell you how your service ranks in comparison to competitors, how competitive your pricing structures are, their satisfaction with your sales process, how well your product performs, their experience of your service, and any gaps that might be sitting in your blind spot. This gives you the ‘as is’ situation and is an invaluable starting point.

Competitors

It is important not to become so fixated on your competitors that you lose sight of your own direction, but you certainly want to know what your competitors are up to, lest you get blindsided by their actions.

Ideally, you would arrive at the strategy session understanding the market shares of your various competitors. In addition, you would know the share of wallet that they attract, and compare this to the share of market. Variances between the two indicate a pricing strategy that may deserve closer inspection. If accessible, a study of the competitors’ financial statements is never wasted as this indicates industry growth rates, profit rates, margin rates and the like for comparative purposes.

Then, a subjective analysis can be completed, but this can be done during the workshop. Here, the focus is on the offering and the softer skills that your competitors bring to the table.

How strong are their customer relationships?

How well do they sell against your products?

How are they achieving their growth?

What do they do particularly well where your performance is sub-par?

What do you do particularly well, that outshines them?

The more heads that think through these issues, the more objective the information becomes.

What you’d like to achieve at the end of this session is a list of things that your customers insist you have in your offer, ranked against your competitors. Then, you’ll have a list of ‘order winning’ value added offerings, also ranked against your competitors. You’ll be able to see where you are performing better, and worse, than your rivals.

Competencies

This is the time to review what your organisation does particularly well, that when combined in the larger context and when compared with that of your competitors, can create a meaningful and valuable differential for your organisation.

What you are seeking here is something that your business does that your competitors cannot match. Often, these are the things that become ingrained in your culture. They are not a process, they are not a pricing point, but rather are embedded into the way you do business. Think Apple, think design and functionality. Think Ferrari, think performance and exclusivity. When I think of your company, what should the association be?

If there is nothing that your business does that can differentiate it, then this becomes the part of the strategy workshop where you decide what skills your organisation needs to develop or acquire in order for it to effectively compete.

There are a number of frameworks that are useful at this juncture, but all of them ask what your organisation can uniquely bring to the market, and how long you believe this uniqueness is achievable. If your competitors are able to replicate your uniqueness quickly, then your competitive advantage can be eroded before its paid for itself. Where little differentiation exists in a market, the common point upon which to compete becomes price. Margins erode in the effort to win business. Either differentiate, or be prepared to become a low-cost producer.

Creating a Unique Space

This is where strategy becomes as much art as it is skill. The real end-game of strategy is to create a space that completely disrupts your industry, and where your organisation sets the rules of the game. Playing by rules set by others means that you are always watching and waiting, instead of setting the pace and direction.

Thinking of a realistic opportunity takes incredible focus, deep thought, creativity and imagination. At times, new industries are created where the borders of current industries exist so this is a good place to look first.

What Happens After All is Said and Done?

The chosen strategy should be captured in an Executive Summary of no longer than 2 to 3 pages. Anything longer creates confusion and apathy by those who are expected to wade through reams of inputs in order to reach the implementation section.

The chosen strategy must be presented to and worked through in a workshop with those who will play any part in its implementation. Ideally, small teams will be tasked with the implementation of certain aspects of the whole picture.

Remember that the contents of that strategy must form the conversation point of the executives from that point forward. If all you talk about is profit, profit is what the business will chase. If you focus on strategic delivery in each of your conversations, the business will deliver. And, when you’re tired of talking about the strategy, you’ve likely only done 10% of the job needed, so keep talking strategy.